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Economy

Tony Nash and Kristina Feller: The age of Asian infrastructure has begun

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Indonesian President Joko Widodo, left, and Sheng Guangzu, general manager of China Railway, center, attend a groundbreaking ceremony in Walini, Indonesia, on Jan. 21 for the Jakarta-Bandung high-speed railway line.   © Reuters

Asia has a rich and well-documented history of early civilizations and seafarers. From China's Great Wall to the vast complexes of the Khmer and Pagan kingdoms in Cambodia and Myanmar, respectively, and the roads of India's Emperor Ashoka, these ancient cultures boasted sophisticated and diverse infrastructure that responded to the varying topographies, climates and natural resources of the region.

     Today, Asian countries are faced with huge populations and growing consumer classes that have put unprecedented demands on infrastructure and new projects are needed to keep up with capacity needs. This will inevitably define a new era, an age of Asian infrastructure, for the building, support and maintenance of these undertakings.

     Asia is using the demand for infrastructure to promote greater regional connectivity for trade, tourism and commerce. Infrastructure will be the key to further economic success in Asia, and there are diplomatic gains to be had. China, Japan and South Korea are in a fiercely competitive race to build in rapidly developing markets, such as Myanmar.

     No doubt, they are using infrastructure demand to promote geopolitical strategies and achieve more integrated diplomatic and industrial leadership roles in the region. China has taken this a step further by spearheading the establishment of the Asian Infrastructure Investment Bank, leveraging its dominant trade ties within the region. Furthermore, China is the region's largest exporter and arguably has the most to gain from achieving regional infrastructure connectivity.

MAJOR IMPACT   There is no greater validation of this new era than the recent launch of the AIIB. It is arguably one of the most significant diplomatic initiatives of recent years. Beginning in 2013, nearly 60 countries signed up to the AIIB as founding members, which confirms that infrastructure is a priority focus and essential component of economies and investment both in the region and with global trading partners. It also shows this new financial institution has filled a gap for Asian nations in achieving crucial connectivity to support economic and population growth.

     Of course, the Asian Development Bank and the World Bank have supported major initiatives in the region for years. Multilateral banks are immensely helpful, and Asian countries are gaining the wealth and knowledge to finance, design, build and operate roads, ports, railroads and other strategic infrastructure assets on a world-class scale.

     China's initiatives alone are providing massive capital for infrastructure expansion. The AIIB, with $100 billion in overall funding, the New Development Bank BRICS, with another $100 billion, and the Silk Road Fund, with $40 billion solely from China, support the efforts of the China Export-Import Bank and the China Development Bank to extend the country's influence both regionally and globally. For example, the China Exim Bank funded more than 1,000 projects as part of the government's Belt and Road Initiative in 49 countries in 2015. The Chinese Academy of Social Sciences has estimated that the Belt and Road Initiative will have a $6 trillion impact.

     By 2020, China plans to have built 88,000km of highways. That would be more than the entire U.S. interstate highway system has now.

     China is not the only proponent of new infrastructure. Last May, Japan committed $110 billion for "quality infrastructure" in Asia. India has committed to building approximately $150 billion of roads, railroads and ports. The ADB estimated in 2009 that Asia would need $8 trillion of primary infrastructure by 2020; this need is gradually being filled. The driving factors that have triggered the infrastructure demand are generally the same: economic growth and stability, attracting foreign direct investment, and maintaining a strong labor force.

     But who will win in the age of Asian infrastructure? Competition for infrastructure business in Asia has created a buyer's market in terms of finance and technical skills. Last year, Indonesia awarded a high-speed rail project to China, with the initial construction costs borne by the Chinese in exchange for rights to operate and maintain the new line. In India, the Japanese government has committed to financing a high-speed rail project with zero loan payback for 10 years, after which interest will accrue at 0.3% a year. These are extremely positive steps for an urbanizing region with creaking infrastructure and growing wealth and will benefit governments, service providers and financiers.

CHALLENGES, BENEFITS   These initiatives are diverse both in goals and delivery models. There is a need to strengthen both government-to-government relationships and government-private sector relations. For some projects, joint responsibility could be appropriate, others could be structured as public-private partnerships, and there could also be privatized models for the full construction, operation, ownership and perhaps ultimate transfer of finished, functioning infrastructure to government. There will also be quasi-governmental companies emerging to lead strategic initiatives that can be fast-tracked.

     The structuring of infrastructure deals and a holistic approach to project sequencing need serious consideration and fresh ideas to make the projects fully successful. Furthermore, there must be consensus and agreement on regional infrastructure specifications and requirements so that the vast investments being made can achieve and surpass today's vision of the future.

     The age of Asian infrastructure will not reflect one nation's aspirations or needs, nor is it the long-term goal of a single multilateral bank. Instead, it is the transformation of an entire region amid rising wealth, urbanization, and human and intellectual capital development. While plenty of challenges lie ahead, the benefits far outweigh the risks as the entire region gains through the financing, provision and use of physical and social infrastructure.

Tony Nash is chief economist at Complete Intelligence, an economics, risk and industry advisory company in Singapore. Kristina Feller is managing director of Freestone Strategies, an advisory and management consultancy in Singapore.

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